Q1's 2.9% GDP decline is "giving me heartburn," says St. Louis Fed boss Jim Bullard in a TV appearance, but it's an aberration and doesn't seem to match up with other economic data out there.

Markets - currently predicting the first rate hike within a year - have it about right, says Bullard. The economy seems pretty good and inflation should be over 2% in 2015 - together, ripe conditions for tighter policy.

The disappointing April durable goods print combines with yet another big revision downward in Q1 GDP to send the 10-year Treasuy yield lower by four basis points to 2.54%. The short end parties as well, with December 2016 Eurodollar futures up 7 basis points to 97.96 (higher Eurodollar futures mean lower rates), still pricing in about 200 bps of rate hikes between now and then.

Presenting various frameworks for figuring where the Fed Funds rate should be, Philadelphia Fed chief Charles Plosser says even the weakest view suggests a rate hike in Q3 with a 1% Fed Funds rate by the end of 2015. The strongest outlook suggests Fed Funds at 4.7% by the end of next year.

The decline in headline unemployment to 6.3% overstates the improvement in the labor market, says Yellen, explaining why the Fed plans on holding rates low even after the rate falls to 5.5%.

At least part of the decline in the rate represents what Yellen calls "shadow unemployment" - discouraged workers who have exited the labor force, but would return if prospects improved.

Markets are starting to take some direction, with the S&P 500 (SPY) now ahead 0.6% and the 10-year Treasury yield sinking four basis points to 2.61%.

Asked an interesting question about whether Fed policy is at odds with itself - with one hand, the Fed wants credit to flow to help boost the economy, but with the other hand is stifling credit with new regulations - Yellen says the boosted oversight is needed to prevent another financial crisis, and from her seat credit is broadly available.

The higher-than-forecast 0.4% rise in the CPI in May (with core CPI +0.3% also ahead of estimates) sends Treasury yields higher, with the 10-year up two basis points to 2.62%. TLT-0.3%, TBT+0.6%. At the short end, Dec. 2016 Eurodollar futures are lower by 4 basis points (thus pricing in a higher Fed Funds rate at that time).

On the flip side, housing starts in May disappointed, slipping 6.5% from April's pace. The annual rate of 1M is still 9.4% ahead of the pace in May 2013. Single-family housing starts in May of 625K were 5.9% lower than April.

Building permits of 991K were 6.4% lower than April and down 1.9% from a year ago.

Short Sterling futures have priced in a 25 basis point hike in British interest rates before year-end following Mark Carney's suggestion yesterday that a rate boost could come sooner than markets expect. The market has also priced in 25 basis point boosts for each quarter of 2015.

Looking at U.S. rates, the long-end of the Treasury curve didn't react to Carney's unexpected hawkishness, but the short end is a different story, with the 3-year Treasury yield up 5.5 basis points to 0.952%, the highest since May 2011. Looking at Eurodollar futures, the timing of the Fed's first hike was nudged forward a bit to about April of next year.

Back in his chair at Pimco, Paul McCulley declares mission accomplished not just on the war on inflation, but also for the Fed strategy of "opportunistic disinflation," along with what used to be called "pre-emptive tightening."

The man who declared Alan Greenspan had hiked rates for the last time in his career shortly before The Maestro launched a multi-year series of rate hikes, says bond investors should ignore pricing inflation risk into bond yields and the true neutral real interest rte is likely close to 0% over the next few years, implying the Fed Funds rate won't go higher than 2%.

One month ago saying the price level had stabilized at a low level, St. Louis Fed chief Jim Bullard now says inflation is on the rise, and the FOMC is closer to its goals than at any point in the last five years.

The man who only months ago dissented from the dovish side, now says the "Fed faces a classic monetary policy challenge ... how quickly should the committee move to return monetary policy to normal." He's not a voter on the FOMC this year.

Ten-year Treasury yields tick a hair higher as his comments hit the wires, now up two basis points to 2.62%. There's more reaction on the short end, where June 2016 Eurodollar futures are off 5 points to 98.46, now pricing in about 125 basis points in rate hikes between now and two years from now.

“The most consistent way to trade a payrolls release this year has been to fade any rates sell off that results from an above-consensus NFP result," says Janney chief fixed-income strategist Guy LeBas, noting this morning's inline report may not offer that opportunity today, but the trend of the retreating importance of NFP and "every other high-frequency result" in driving policy continues.

Edison Investment's Peter Molloy, however, says the 2.1% Y/Y growth in average hourly earnings indicates marginally less slack in the U.S. economy than previously thought. "It’s a difficult time for Fed policymakers as they have to balance their views on how this cycle might be different with unemployment at levels which would more usually be associated with low but rising interest rates. We can see why at least some Fed officials are concerned that markets are too tranquil given the uncertainties.”

The 10-year yield is lower by two basis points to 2.56%. Eurodollar futures are higher by a couple of basis points (yields lower), with the first rate hike still pretty much priced in by June of next year.

"Being different is absolutely essential if you want a chance at being superior," says Howard Marks. Hoping to return to the top of the heap in fixed income performance, Bill Gross is at odds with many on the Street, loading the portfolio of the Total Return Fund (ETF: BOND) with Treasurys in the belly of the curve.

The play is a bet on Gross' "new neutral," in which the neutral Fed Funds rate is at least a couple of hundred basis points less than commonly believed. If he's right, Treasurys with duration in the 3-7 year area should benefit the most as rate hikes are postponed or come in at a far slower pace.

"Once they see the whites of the eyes of full employment, they will want to normalize rates at a faster clip," says Jonathan Beinner, co-head of global fixed income at Goldman Sachs Asset Management, summing up the conventional Street wisdom.

Investors have generally underestimated the impact QE has had on the economy, says Stephanie Pomboy in a Barron's interview, and as a consequence are underestimating the effect of the taper. That the economy has no self-sustaining momentum is starting to come into focus though, she says, expecting to see nominal growth continue to decline. "Over the longer term there is no material upside risk to Treasury yields ... You want to sell at 2% and buy at 3%."

Housing is key, says Pomboy, and there's little doubt QE had an enormous positive impact on the sector. This more or less came to and end one year ago when Ben Bernanke simply raised the possibility of the taper, and housing hasn't recovered its footing since. "What we need to sustain housing from here, if anything, is lower rates, not a taper."

Summarizing her view of the economy is a chart comparing net worth with consumer spending. Household net worth is up $25T since the March 2009 bottom, but spending growth hasn't materially accelerated alongside - an unprecedented occurrence over the past 50 years. And what spending increase there has been, she says, is almost fully the result of inflation - hardly a sign of consumer strength.

The third mandate: It looks like it's up to buyers and sellers of financial assets when it comes to how quickly the Fed moves when it begins its rate hike cycle. FRBNY chief Bill Dudley says the FOMC will keep a close eye on markets as rates move up. If the response is relatively mild - like the way the bond market has treated the taper - than the Fed may move quicker. If markets tank, than slower.

Harkening back to the "new normal" thesis peddled by former colleague Mohamed El-Erian for the past few years, Bill Gross (BOND) talks of a "new neutral" to try and explain why 2.50 on the 10-year Treasury is a perfectly reasonable yield.

With debt remaining high and economic expansion continuing to be lame, the "new neutral" real Fed Funds rate is about 0%-0.5%, says Gross, along with Richard Clarida. "If the new neutral policy rate is 0% and the Fed achieves its 2% inflation target, than the 10-year Treasury should trade at close to 2%."

The investment implications: Bubble risk is lower than expected as markets have priced in a real Fed Funds rate of 1-2% and nominal of 3-4% by the end of the decade. If the "new neutral" of 0% real rates and 2% nominal plays out, asset markets could see plenty of support.

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